The ratings agency is worried that “roughly one third of the banking system’s assets are booked as Greek exposure, including that of Greek subsidiaries based in Cyprus.”

FT Alphaville picks up on an intriguing point. Of the €14 billion Greek bond total, “S&P said in April that Cypriot banks hold €5.8 billion in Greek government paper, which suggests that the remaining €8.2 billion lies in Greek banks’ Cyprus subsidiaries.”

Evening rush hour traffic comes to a standstill on a hazy and polluted day in Beijing on December 1, 2010.

Is there a China link to Europe’s sovereign debt problems?

James Hamilton, an economics professor at the University of California, San Diego, has drawn an intriguing connection on his Econbrowser blog. During the spring, he noted, the spike in Greek yields that triggered the initial sovereign debt crisis was associated with China’s early efforts to tighten its overheating economy.

Concerned that a huge expansion of bank credit would trigger bubbles and generalized inflation, China put the brakes on. This was followed by a 25% correction in Chinese equity prices. It was during this period that the Greek sovereign debt problems surfaced, sending yields on Greek government bonds rocketing, and threatening contagion across the euro zone.

By early summer, the Chinese government, worried that a slump in domestic equities would portend a wider economic crash, tapped on the accelerator again. Meanwhile, Europe’s huge rescue plan for Greece eased pressure on euro-zone sovereign debt.

But with inflation pressure on the rise, the Chinese government has once again been forced into taking action. Although most of its efforts have been aimed at price controls, they’ve started to turn the screw on interest rates as well. Chinese equities have dropped around 10% since.

Is it a coincidence that the European debt problems have blown up again, this time forcing a rescue of Ireland with the risk that it’ll spread across the whole of the euro zone’s periphery?

It’s not easy to find good news if you’re an owner of Greek government bonds right now. But the announcement that Greece’s civil service is to go on strike later this month should help ease the government’s financial problems.

Greek bond prices have fallen sharply this week, driven by the fear that the government won’t be able to raise new funds at an interest rate that would allow it to meet its deficit reduction targets. If it can’t borrow, the government may have to cut spending even more than it planned to.

In March, it unveiled €4.8 billion in cuts and tax hikes. But by going on strike for a day later this month, Greek civil servants will be saving the government €42 million. That estimate is based on 350,000 civil servants who are paid an average of €1,200 not turning up for work. In effect, that’s a voluntary pay cut. If the civil servants were to stay on strike for the rest of the year, the government would save €8.2 billion, and it wouldn’t have a financing problem.

So, for investors, it’s buy on the strike, sell on the return to work. That rule generally applies to financially strapped European governments. Labor unrest is commonly regarded as a sign of trouble, but in fact the more rebellious the public sector, the better for bond investors.

In which case, Ireland’s compliant public sector unions are a good reason to sell the government’s bonds.